Advisories & Insights

In a decision that finally ends the speculation (at least in the Ninth Circuit) concerning whether an insurer can ever obtain reimbursement directly from the insured under a group health plan, the Ninth Circuit held in Providence Health Plan v. McDowell, -- F3d --, 2004 WL 574982 (9th Cir, March 24, 2004), that an insurer's attempt to enforce a plan reimbursement provision is not preempted by ERISA, and is appropriately brought as a state law claim for breach of contract. This decision is significant in that it provides insurers with a method of obtaining the "legal relief" prohibited by ERISA.

The Ninth Circuit has long held that claims for reimbursement by a health insurer are "not cognizable" under ERISA because the relief sought is not properly equitable. FMC Medical Plan v. Owens, 122 F3d 1258 (9th Cir. 1997); Reynolds Metal Co. v. Ellis, 202 F3d 1246 (9th Cir. 2000).

The Supreme Court added a gloss to this issue in Great West Life v. Knudson, 534 US 204, 122 S Ct 708 (2002), in which it redefined and clarified the scope of equitable relief available under ERISA, holding that the plan's attempt to recover reimbursement directly from the plan participant was essentially a claim for legal relief not authorized by ERISA. The Court suggested that the relief sought might properly be equitable if an identifiable res existed and a traditionally equitable claim for relief--such as a constructive trust--were pursued.

Post-Knudson cases have attempted to walk a fine line in determining whether the reimbursement sought is true equitable relief, or simply a legal claim disguised as equitable relief. The Ninth Circuit confused things even further in Westaff v. Arce, 298 F3d 1164 (9th Cir 2002), in which it held that the plan's claims for declaratory relief and specific performance were not cognizable under ERISA even though the disputed funds were placed into a joint escrow account pending determination of to whom the money was owed. Notably, there was no clear guidance from either the Ninth Circuit or the Supreme Court as to whether a claim for legal relief under state law would be preempted by ERISA.

It was in the midst of this uncertainty that Providence sued McDowell in Oregon state court, asserting a state law claim for breach of contract based on McDowell's failure to reimburse the plan as required under the plan's subrogation/ reimbursement provision. McDowell removed the action to federal court, asserting that the contract claim was preempted by ERISA. The federal judge agreed, holding not only that Providence's claim was preempted by ERISA, but also that the relief sought by Providence was legal in nature and not permitted by ERISA. Providence Health Plan v. McDowell, Civil No. 01-1704-JE (D. Or 2002). In sum, the judge concluded that Providence was left without a remedy.

In its recent decision, the Ninth Circuit disagreed, reasoning that Providence's claim to enforce the reimbursement provision did not "relate to" or "have a connection with" an ERISA plan because it did not require interpretation of the plan or dictate any distribution of benefits. Moreover, Providence's claim did not fall within the scope of ERISA's enforcement provision because ERISA allows a fiduciary to seek only equitable relief for violation of a plan, and Providence's claim for monetary damages could not be brought under ERISA. Because neither of the elements of ERISA preemption were met, the Court concluded that Providence's claim was not preempted by ERISA. The Court noted that this conclusion was consistent not only with Knudson, but also with its previous decision in Owens that "insurance companies could not look to ERISA's provisions allowing equitable relief to obtain reimbursement from their insureds." The Court therefore reversed the district court's decision with instructions to remand to state court so that Providence could proceed with its breach of contract claim.

The good news is that plans in the Ninth Circuit now have a clear remedy against insureds who refuse to abide by their contractual obligations to reimburse the plan from any proceeds received from a third party. The bad news is that it remains unclear whether the Ninth Circuit's decision applies to all attempts to enforce a reimbursement provision, or only those seeking legal relief. In other words, since ERISA expressly authorizes fiduciaries to bring claims for equitable relief to enforce the terms of the plan, would a fiduciary's attempt to impose a constructive trust upon monies recovered from a third party be governed by ERISA? Westaff v. Arce suggests not; Knudson on the other hand, suggests that it would.

Another important caveat is that these issues are further muddied in Oregon, where the Oregon Court of Appeals reached the opposite conclusion just last month, holding that ERISA does in fact preempt a contract claim seeking enforcement of the plan's reimbursement provision. Liberty Northwest Ins. Co. v. Kemp, 192 Or App 181 (2004). That decision has been appealed to the Oregon Supreme Court whom, it is hoped, will defer to the Ninth Circuit's decision so that there is at least uniformity in the state on this issue.

Because the law on this issue remains in flux, we recommend contacting local counsel before proceeding with any reimbursement claims in the Ninth Circuit.